Forex Market Focus: Before the US February CPI, the US dollar and Japanese yen exchange rate rebounded with US bond yields

2023-03-14 17:16:30

Here's what investors need to watch on Tuesday, March 14:

Markets remained calm early Tuesday as investors tried to figure out how the collapse of Silicon Valley Bank (SVB) would affect the policies of major central banks after the collapse of the financial sector exposed vulnerabilities in the financial sector.

President Biden said the administration's swift action to ensure depositors have access to money from Silicon Valley Bank and Signature Bank should reassure Americans that the U.S. banking system is safe.

The dollar index rebounded modestly around 104.00 ahead of the release of U.S. February consumer price index (CPI) data, with the benchmark 10-year U.S. Treasury yield expected to hold steady at around 3.5%. The two-year U.S. Treasury yield plunged 57.2 basis points to 4.016% on Monday, its biggest one-day drop since the Black Monday stock market crash in 1987. U.S. stock futures were slightly higher in European morning trade after Wall Street's main indexes were mixed on Monday.

The S&P 500 financial index fell nearly 4% on Monday, hit by the collapse of Silicon Valley Bank and Signature Bank. Meanwhile, Moody's announced late Monday that it was downgrading the debt ratings of signatory banks to "junk" status and putting First Republic Bank, Zion Bank (ZION), Alliance Western Bank (WAL), CoCredit Bank (CMA), umb Financial (UMBF.US) and InTrust Financial are on the review list.

Shaun Osborne, chief currency strategist at Scotiabank, said: "Despite the rather significant financial risk nature of these developments over the past few days, we really haven't seen a bid for the dollar from a risk-off or liquidity standpoint. . Much of this reflects a repricing of the Fed's interest rate outlook, at least in the short term."

Fed funds futures tumbled, with expectations for a peak Fed rate slipping to 3.84% from above 5% last week. the

Barclays said the latest bout of financial market jitters had created significant uncertainty for markets, with policymakers putting on hold on rate hikes at their meeting next week.

As markets speculate on how the Federal Reserve will handle monetary policy and try to keep inflation in check, the focus turns to Tuesday's consumer price index (CPI) data. It is expected that the annual rate of CPI in the United States in February will drop to 6%, the previous value is 6.4%, and the core CPI is expected to record 0.4%.

The U.S. economic calendar this week also includes producer price index (PPI) and monthly retail sales data on Wednesday, which should influence USD price dynamics. However, the focus will remain on next week's key central bank event risks - the outcome of Wednesday's two-day FOMC meeting, followed by Thursday's Bank of England policy decision.

Interest rate futures are pricing in a 43.9 percent chance of no rate hike at next week's meeting, about the same as a 50 basis point hike a week ago, according to the CME's FedWatch tool.

EUR/USD

EUR/USD rose to a one-month high of 1.0750 on Monday, but retreated on Tuesday. The exchange rate is currently trading in the negative zone below 1.0700. The pair corrected lower from 1.0740 as upside momentum dried up. The euro is expected to remain cautious ahead of the release of the US Consumer Price Index (CPI).

S&P 500 futures traded in Asia after a choppy Monday as the disastrous collapse of Silicon Valley Bank (SVG) deepened fears of a U.S. recession and investors expected the Federal Reserve to raise interest rates modestly. There was a sharp rebound during the trading session.

In the euro zone, MNI reported that the European Central Bank plans to raise interest rates by 50 basis points at its March meeting, even as market interest rate expectations have fallen amid the Silicon Valley Bank turmoil.

Given this fact, Eurozone inflation has been extremely strong and has yet to soften significantly. Therefore, ECB President Christine Lagarde has no choice but to further fine-tune interest rates.

European Central Bank (ECB) policymaker Stunaras (Yannis Stournaras) said in an interview with a Greek newspaper on Tuesday that he did not think the failure of Silicon Valley Bank would have any impact on euro zone banks.

GBP/USD

GBP/USD entered a consolidation phase below 1.2200 following Monday's surge.

Data released by the Office for National Statistics on Tuesday showed that the number of people claiming unemployment-related benefits fell by 112,000 in February, compared with expectations for a drop of 12.4. In addition, the previous month's data was also revised to a decline of 303,000 from the initial estimate of 12.9. Also, the unemployment rate held steady at 3.7% in the three months to January, against expectations for a slight rise to 3.8%. That largely helped offset slowing UK wage growth data and did little to boost market bets on an additional rate hike from the Bank of England (BoE) later this month, giving sterling some support.

Additionally, expectations that the US central bank will slow (if not halt) its rate hike cycle amid stress in the US banking system could dampen any meaningful upside in US bond yields and prevent dollar bulls from making aggressive bets .

GBP/USD pared small intraday losses following the release of the UK's monthly employment details and climbed to the upper end of its daily range during the European morning on Tuesday. Meanwhile, spot prices remained below the 1.2200 mark, a one-month high hit on Monday.

Traders are currently leaning on the sidelines and awaiting the release of the key US CPI report, which will be released during the North American morning session.

USD/JPY

USD/JPY rebounded late in the North American session after falling nearly 2% on Monday and touching its lowest level below 132.50.

USD/JPY rose modestly around 133.70, ending a three-day downtrend and bouncing off a one-month low hit the day before. During this period, the yen was boosted by actions in the United States to try to curb volatility caused by risk events from Silicon Valley Bank (SVB) and Signature Bank. The latest recovery in US Treasury yields following the bond market disaster of the previous day could add strength to the USD/JPY rally.

There was short covering ahead of the release of the U.S. Consumer Price Index (CPI). USD/JPY started the week correcting lower as U.S. Treasury yields fell. The fallout from the Silicon Valley Bank (SVB) incident prompted investors to re-examine their rate-hike expectations for the Federal Reserve's planned hike at the March FOMC meeting. The index surged exponentially ahead of the last non-farm payrolls release. Investors were hesitant to make fresh bets on risky assets as the Fed's comments were subdued and called for further clarity on the fundamentals of the U.S. financial ecosystem.

However, policymakers in the UK and Europe, as well as some major countries in the Asia-Pacific region, have ruled out a possible domestic financial crisis following the Silicon Valley Bank incident, so USD/JPY bulls may also be buoyed.

Meanwhile, the US is to publish the Consumer Price Index. The market expects the February CPI announced today to be slightly pessimistic. As the saying goes, "the details are everything," market participants may skip to the services-induced inflation part, as the Fed has expressed concern in many cases.

Spot gold extended gains, rising more than 2% on Monday. Following a technical correction pointing to $1,900 during the early North American session, XAU/USD managed to bounce back and is now just above $1,910.

Following Sunday's surge, bitcoin rallied nearly 10 percent on Monday and headed toward $25,000 early Tuesday before retreating. BTC/USD is currently trading slightly higher at $24,380. Ethereum closed higher for the third straight day, gaining nearly 15% during the period. ETH/USD remained calm on Tuesday, trading just below $1,700.

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